Download Money And its functions and more Study notes Monetary Systems in PDF only on Docsity!
MONEY AND ITS FUNCTIONS
Introduction: In todays hectic life money plays the most important
role in the society. we need money for almost everything, we need
money to satisfy our needs and wants such as for buying food, clothes,
and shelter etc. similarly we need it in order to avail services such as
transport, education, health, entartainment, and so on. We pay money
to buy goods as buyers and receive money by selling them as sellers.
We normally pay and receive money in the form of paper money, coins,
and bank money but in ancient days people exchanged goods for
goods and services for services this system was called the barter
system and with the passage of time money replaced the barter
system.
Definition of money: It is defined as something which is generally
accepted by the society as a medium of exchange and which can act
as unit of account and can store value and for repayment of debts.
Functions: It has three types of functions:
1) Primary functions 2) Secondary functions 3)
Contingent functions
1. Primary functions :
i) As medium of exchange: The very primary functions of money is that it acts as a medium of exchange. Which means people can buy and sell goods and services in exhange of money.
Example; You pay 30 rupees to buy a can of Coca Cola
ii) As unit of account: Another primary function of money is that it acts as unit of account or measure of value. Value of a good is determined by multiplying the price of the good with its quantity
Example; 1 can of Coca Cola is for 20 rupees. Hence 10 cans of Coca Cola would be for 200 rupees (20x10= 200)
iii) As a store of value: Money acts as store of value as well. If you have money you have the power to purchase goods and services. it has purchasing power
Example; If you have 100 rupees in your pocket and a price of an orange is 10 rupees you have the purchasing power to buy 10 oranges. you have the purchasing power of to give 100 rupees as value.
iii) As a standard of deffered payments: there are many people that want to borrow money to satisfy their present needs and wants may be with the condition that they will settle the payment along with interest in future date as agreed with the lender. This payment in future is acceptable in money only. it can also be said that the borrower has deferred the payment. So money has served as a standard of deferred payment.
Example; your friends borrows 100 rupees to buy a bag and promises you to pay a interest of 1 rupees in some future date. maybe the bag lose some of its value after a while of buying. But money will always be accepted in the future date as it has stored the value.
2. Secondary functions:
i) Aid to specialization, production and trade: money has the potential to influence economy that is why it replaced the barter system. It has ended the difficulties of the barter system. The production of commodities, trade and market mechanism are all facillated by the use of money without money it is not possible for any country to grow economicaly.
ii) Influence on income and consumption: the use money has direct relation with income and consumption. The higher the production is the higher will be the income and consumption. The more people have income the more they will consume goods and services and their income will become a source of income for the other person.
iii) Money is an instrument of making loans: The money deposited by the people in banks (savings ) are further invested by banks and are lend to the different businessmen, traders, industrialists. thus it is an intrument of making loans.
iv) Instrument of economic policy: Money is the most powerful factor that influences the economy. In order to boast economy,the rate of unemployment should be reduced, purchasing power should be increase, inflations should be stable, and expansion of economy should be mentained.
v) Money as a tool of monetary management: Money helps in increasing production and employment if it is used effectively. The more effective investments are there the more will be the income of employees and the more it will increase standard of living of a country. The higher the income is the higher will be wealth. That is why it is an important tool of monetary management.
3. Contingent Functions:
1. Role of Money in a Capatalist Economy: In a capitalist economy,
the government steps aside and allows all businesses to do whatever they want to do in order to maximize their profits. They don't try to control prices, they don't place restrictions on with whom one can do business, and they don't apply taxes on companies or individuals as they should be. This allows companies to grow organically, and allow the best ideas to increase. The problem with the lack of control is that sometimes, this incentivizes companies do things that generate more money over doing the right thing by society. Money is the objective in a capitalist society. The system was created to allow the best ideas a chance to bubble to the top regardless of social class or other satisfying factors. But it can also cause problems for society if left unchecked. Because in a capitalist society, money is the only thing that drives people, and it doesn't always line up with doing what is right. And income and wealth goes only in the hands of those who are already rich and those who organize the production. The rich becomes richer and the poor becomes poorer. The national income or dividends are not distributed fairly.
2. Role of Money in a Socialistic Society : In a socialistic economy,
money serves as a standard of value, a medium of exchange, a store of value and standard of deferred payments. The role of money in a planned economy is not only for rich but mostly for poor people. The country keeps a strong control over the supply of money and tries o reduce bad effects or evil effects of money on people. Money in a socialistic economy is never allowed produce through the free play of market forces or no taxes on companies or on individuals.The resources are distributed according to plan drawn up well in advance by the planning authority. The desire of what, where and for whom is to produce are all controlled by the state. Similarly, in a socialistic economy the central authority itself considers the consumptions and keeping in view the likings and disliking of the people. There is no price mechanism operation for the direction of consumption pattern.
In a centrally controlled economy, all the factors of production are controlled by the state officials. The dividends of each factors of production are paid not by matching demand and supply but by the quantity and quality of work done. We can say that as money in a socialistic economy is effectively under the control of the state so there are no evil effects of changing price level, income and employment in the country.
